Yen's rise has major implications for other currencies
July 17 (Reuters) -The yen's rise has major implications for other currencies because many investors shave sold it to fund their investment in carry trades.
The rally heightens the risk of FX losses for trades that depend on slow moving markets in order to profit from interest rate differentials.
The Japanese currency, which is undermined by the world's lowest interest rate, is the optimum way to fund these trades, and it has been driven to a record low this year by the Japanese central bank's continuous bond purchases.
This is set to change on July 31 when the Bank of Japan is expected to announce changes in the amount of bonds it buys.
Although buying is expected to continue which could drive yen down in the future, there is a strong chance that a market very short yen reacts in a significant way in the near-term.
The adjustment of a potentially overcrowded bet could lift the yen much further, heaping pressure on currencies investors have purchased.
While many carry trades are focused on the dollar, they also favoured the pound, euro, Canadian and New Zealand dollars and much less liquid currencies like Mexico's peso, Hungary's forint and Polish zloty.
A shakeout of carry trades could spur the unwinding of popular speculative bets like those on pound and New Zealand dollar rising.
Pressure on the Swiss franc could increase if traders switch the source of funding for their carry trades to an alternate major currency with a suitably low interest rate.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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